Wednesday, March 27, 2013

In the wake of the global recession one thing
is clear, both the private and public sector will need to find ways to do more
with less. Local government’s felt the growing pains of this “new normal” as
policy makers cut funding in the form of aid, including local government aid
(LGA).

LGA is generated too off-set the reliance of
property tax revenue to cities that can achieve financial solvency exclusively
through their own source revenue.Over the last decade the portion coming from property tax has risen 37
percent and the portion coming from state and other governments has fallen 25 percent
(1). MPR states, Local government
aid, sometimes called LGA, was designed to help cities that have greater needs
than what they could reasonably cover in property taxes. The cities that came
to depend on LGA also tended to serve as regional hubs, providing services for
people not paying into property tax funds. The vision was that no matter where
you happened to live in Minnesota, the quality of services would remain
basically constant.”

Each year the Minnesota Department of Revenue
gives each city a notice of how much it can expect in the next fiscal year in
the form of LGA. Some cities receive none and other can receive up to two
thirds of their budgets.

The League of
Minnesota Cities sates, $425 million in LGA will be distributed in 2012; $427.5
will be sent to cities in 2013. In 2003, before the legislature reduced LGA,
cities were expecting $587 million (2). MRP(1) states, “ Another way to
see the trend is to look just at the past year. For all cities with more than
1,000 residents, property tax levies increased by $69 million. At the same
time, the amount cities received from the state dropped by $259 million,
according to the Minnesota Department of Revenue”.

The intent of the LGA program in the 1970’s
and 1980’s was to stabilize local government revenue streams, although it is
clear that it is subject to the same sources of instability as federal revenue
streams ( 3).

Asthe revenue
stream shrinks , how will the tax/levy structure change who will bear the brunt
of the cost and who will receive the aid. Humphrey Alumni Brenden Slotterback
has explored this topic in his blog Net Density.He states that in 2011 one proposal from the legislature was
to cut LGA in the metro cities and counties while preserving it for communities
in greater Minnesota (4).Slotterback provides useful spatial information from the Department of
Revenue regarding dispersal and collection of LGA funds. His maps show where LGA is going in the
state, with Hennepin County, Ramsey County, and St. Louis County ( home of
Duluth) receiving a combined 44% of LGA.

Slotterback raises interesting questions
about LGA. He asks, “Lots of money is going to the
metro, but is it being spent effectively? There are a lot of people in
the metro compared with the rest of the state, are we getting our money’s worth
(or is the rest of the state getting their money’s worth)?” He states that when
lookingat LGA per capita, the
metro seems like a pretty good considering it’s the economic driver of the
state. However, suburban metro counties receive the lowest per
capita LGA in the state. Even Hennepin and Ramsey counties are receiving less
LGA per capita than most non-metro counties.

He then shows a map of dollars received per
one dollar sent to the state in taxes, concluding that urban counties receive
less in aid and credit than they pay in taxes, with Hennepin County receiving
.61 per 1.00 in taxes.

He also states, “ It
may be fine for the metro to contribute more than its share to the state.
Most people (myself included) would probably agree we want consistently
good roads, schools, and community services across all of Minnesota, not just
in the rich parts. However, zeroing out aid to metro communities while
maintaining it for non-metro communities hardly seems like a nuanced policy
solution for budget problems – especially when they are already contributing
much more than they take”. Slotterback goes on to point out the importance of
thinking about the economic impacts of the entire state if the urban
communities can no longer provide effective government and services (4).

The
connection between LGA and economic drivers in the state is interesting to
think about. Will cutting funding from LGA make cities more efficient in the
services they provide and show what they truly can afford? Or will it hamper
public services, which could deter economic development and attraction of the ‘millenials’
as they enter the workforce and begin to settle into new communities.

Tuesday, March 26, 2013

Decreasing tax bases are putting pressure on local and state
governments to find additional sources of revenue to fund the services they
provide. The general public’s opposition to any sort of tax increase has put
additional strain on governments on where to look for more revenue. As a result,
governments have made huge increases in traffic violation fines, especially
speeding tickets in recent years.

No one is sure how many traffic tickets are given out,
because local governments often keep that information confidential in order to
avoid sharing revenues with state governments. It is estimated that between 25
and 50 million traffic violation tickets are given out each year. The cost of the tickets varies by offense and by state, although the average cost for a
speeding ticket is $150.
But the total cost of speeding tickets can fluctuate depending on how fast the
driver was actually going and other assorted court costs and fees. At the
average cost, local governments around the nation make between $3.75 to 7.5
billion in profits each year off of traffic tickets.

A study in North Carolina found that as the number of
traffic citations issued will go up the year after a decrease in government
revenues. The study showed that a one percent decrease in local government
revenues will result in a 0.32 percentage point increase in the number of
traffic citations given out the next year.
It seems that when governments see decreases in their current revenue streams,
they look elsewhere to fill the gaps. One of the easiest places is traffic
tickets because there are no restrictions as to how high they can be raised,
unlike other revenue options. This is evidence that governments utilize traffic
tickets as a source of revenue. But during years when revenues increase, the
following year does not see a significant decrease in the number of tickets
given out.

Other studies with
data from economic downturns show that a 10% decrease in revenue growth will
result in an increase of 6.4% in the growth of traffic citations.
More studies have been conducted to determine whether traffic tickets are still
mainly an attempt to improve safety for drivers on the road, or if they have
become mainly a revenue tool for local governments, especially with the
increase in red-light cameras installed at intersections. Governments maintain
that the red-light cameras are there to improve safety. These red-lights have
cut down on drivers running red-lights but rear-end collisions have increased
at these intersections, making some question whether the cameras are there more
so to collect revenue instead of actually improving safety. Governments often
share ticket revenue with the manufacturers of the cameras.

The United States is not the only country that has seen high
speeding ticket costs, and in fact some might be glad the US does not follow
suit with some European countries that calculate the amount of fines based on
reported income. This practice has led to the highest fine in history to happen
in Finland, where a driver going 50 mph in a 25 mph received a $200,000 fine
because he earned $11.5 million in 2002.

Finally here is a link that shows how different traffic violations can affect your car
insurance rates.

Local Government Aid (LGA)
has changed drastically in Minnesota since it was created 30 years ago. At the
time the program was enacted, local property taxes were increasing and Cities
with greater property wealth could increase services while other Cities were
challenged to provide services. Reforms were enacted to change the relationship
between the state and local governments, with new state sales taxes and
increased income taxes providing aid to local governments. The aid was intended
to provide tax relief to homeowners and buy down taxes (Office of the State Auditor).

LGA has been somewhat
controversial since its inception. Proponents argue that without it, local
government with lower property wealth would have to increase property taxes and
would struggle to provide basic services to their citizens. At the same time,
opponents argue that LGA is inefficient and that the formula for providing aid
does not accurately target cities with the greatest need (Office of the State Auditor).

LGA has changed
drastically in the past 10 years. Looking at the City of Saint Paul provides a
good indication of how the recession has hit funding availability for LGA.
About 42% of the City of Saint Paul’s general fund budget was covered through
state aid and 25% was covered through the tax levy in 2002. Today, those
numbers have been reversed (Pioneer Press). More specifically the City of Saint
Paul saw a $28 million cut in LGA from 2011 to 2012 (City of Saint Paul).

To combat these problems
and restore the benefits of LGA, the Minnesota Legislature has recently
proposed a bill to simplify the funding formula for LGA and make the program a
more sustainable resource for cities. The amendment to the formula would also
ensure that LGA is directed at cities with the greatest need. The bill would
increase LGA funding by $80 million, ensuring that no cities would see a
decrease in funding. If the bill passes, the City of Saint Paul would receive
an additional $10.1 million in LGA in 2014 (Pioneer Press).

Monday, March 25, 2013

There has
been ongoing discussion about implementing a federal consumption tax in the
United States. One type of consumption tax that has been proposed is a value
added tax (VAT). The VAT is widely used around the world. Over 150 countries
worldwide, and every member of the Organization for Economic Co-operation and
Development (OECD) besides the United States, use a VAT. A VAT is applied to
the difference between a business’s sales of final goods and services and its
purchase of goods and services (excluding wages). The key distinction between a VAT tax and
retail sales taxes is that VAT taxes are collected at each stage of production,
whereas retail sales taxes are only collected at the point of final sale.

A report
by the Brookings Institution found that implementing a 10 percent VAT in the
United States could raise just over 2 percent of GDP in revenues.1
This figure also accounts foroffsetting
adjustments in other taxes and the costs of either cash payments or narrowing
the base. One concern that is raised frequently with the possibility of the
United States incorporating a VAT is the impact it will have on the states
ability to administer their own sales taxes.

Canada
provides an example of how a federal VAT along with a variety of provincial
VATs and sales taxes is feasible to administer. But the question of whether the
added benefits of the VAT are offset by the administrative costs incurred by
the lack of uniformity in consumption taxation among provinces (with some
choosing to forfeit a retail sales tax and others retaining it).

Currently,
Canada has four types of national/subnational consumption tax structures, each
of which are administrated differently: a separate federal and provincial VAT,
both of which are administered by the province; a joint federal and provincial
VAT administered by the federal government; a separate federal VAT and
provincial retail sales tax administered separately; and a federal VAT only.
This has created administrative and compliance challenges for both the
government and businesses. The burden is especially felt by businesses in
provinces with a retail sales tax, because they are subject to dual reporting,
filing, and remittance requirements.2

The
aforementioned report by the Brookings Institution argues that states could
avoid some of this burden by converting their sales tax to VATs and
piggybacking on the federal VAT. This
could offer advantages to the states, such as lower administrative costs.
States could link their VAT tax base to the federal VAT tax base, similar to
how many states currently link income tax, and reduce the costs of administering
consumption taxes.1

Introducing
a federal VAT tax does not seem politically feasible at this time because of
economic instability. However, with the system being widely administered
internationally, it is worth analyzing what implications this would have not
only for the federal revenue raising system, but also state and local
governments.

Wednesday, March 13, 2013

Interested in seeing not only the geographic trends of state income tax but also if these tax rates had changed over time, I set out to spatially analyze this specific tax. I knew that there are states that currently have no state income tax but I wasn't sure of their development and if any states that once had no income tax decided to introduce a state income tax or the other way around. Income tax, because of its visibility, might be less susceptible to changes in its rates because of the perceived political in feasibility and wondered if there were any counterexamples of this dynamic. Thankfully, I wasn't the first person interested in these quandaries and found a robust source of data regarding the variations of state income tax over time.

TAXSIM is a program that calculates tax liabilities for various state and federal taxes that is offered by the National Bureau of Economic Research. The datasets are comprised of real tax returns from the past 40 years and calculates the tax liabilities from the source material based on processes similiar to an "H&R Block." This program contributes a wealth of data to any user interested in tax policy issues and is definitely worth investigating.

The following are map charts that were created using TAXSIM information. The variable of interest is the marginal tax rate for high income earners and refers to the maximum tax rate for an additional $1000 of income on an initial $1,500,000 of wage income (split evenly between husband and wife). The taxpayer is also assumed to be married and filing jointly.
Feel free to comment on any trends or patterns that you notice (such as why Michigan has such an odd shape) as well as any knowledge about a particular state and their reasoning for its change in tax rates.

The final version of the Foreign Account Tax Compliance Act
was released on Jan 17, 2013 by the U.S Department of the Treasury and the
Internal Revenue Service (IRS) in their efforts to combat tax evasion.

What is FATCA:

FATCA was initially introduced to target those who evade
paying U.S. taxes by hiding assets in undisclosed foreign bank accounts. By
signing up the Intergovernmental Agreement (IGA), government-to-government agreements entered into
between the US and the partner country to establish a framework for foreign
financial institutions to report certain account information to their local tax
authorities, FATCA requires foreign financial institutions (FFI) to
report to the Internal Revenue Service (IRS) information about financial
accounts held by U.S clients/taxpayer worth more than $50,000, or by foreign
entities in which U.S clients/taxpayers hold a substantial ownership interest.

Why FATCA is needed
for U.S government:

Study shows tax evasion costs the U.S economy an estimated
$100bn a year, in part due to individuals hiding income in foreign bank
account. The U.S expects the Foreign Account Tax Compliance Act to raise $7.6bn
in tax revenue for the IRS over a ten-year period.

Impacts on Overseas
U.S resident and citizen:

For Americans
living overseas, if the aggregate value of their foreign financial accounts
exceeds US$10,000 at any point in time during the tax calendar year, they need
to report their personal accounts through theReport of Foreign Bank and Financial Accounts (FBAR). In addition to the long-standing FBAR form, FATCA has
brought in a new IRS filing requirement, called Form 8938. The new form
requires taxpayers to provide detailed information on their overseas financial
accounts to the IRS, along with their annual income tax returns. U.S. citizens
who have foreign financial assets in excess of US$50,000 are obliged to report
through Form 8938. Failing to report could result in a penalty of
US$10,000, and up to US$50,000 (for continued failure after IRS notification).
Furthermore, underpayments of taxes attributable to non-disclosed foreign
financial assets will be subject to an additional understatement penalty of 40
percent.

Minnesota Governor Mark Dayton’s recent tax proposals
include many changes to the state’s tax code, and one that stands out is the
“snowbird tax.”This tax is intended to
address a perceived loophole in the state tax code that allows residents to not
pay any income taxes to the state of Minnesota if they live there less than
half of the year.Governor Dayton is worried
that so-called “snowbirds” (who are people, usually retired, who spend the
winter months in warmer climates—some of whom who go to states like Florida and
Texas that don’t have any state income taxes) are filing their taxes in other
states while using Minnesota services for a considerable portion of the year.

The law would tax non-residents who live in the state for
two to six months out of the year.Rather
than taxing income on wages and salaries, this tax would be only tax income earned from stocks, bonds, capital gains and dividends.This strategy appears to indicate that the policy is aimed at retirees who may not
be earning income from working anymore.The
Minnesota Department of Revenue estimates that the tax would generate $30
million in revenue, or 1.5% of Governor Dayton’s proposed $2.1 billion dollar overall
revenue increase.The proposed 2013
overall budget totals $37.9 billion.

One element of the issue that the governor is considering is
the idea of equity.The governor sees
people who spend considerable time in the state and use Minnesota goods
services such as infrastructure, public works, and parks, to not pay taxes that
help maintain that level of services as being free-riders who are not paying
their fair share for services that they are using.Fairness is a concept that Governor Dayton is
making a central part of his defense of this proposed tax.

While in principal this tax might increase equity, it may be
difficult to collect.It would either
force nonresidents to disclose the amount of time they spent in the state, or
it would require the state to add some type of mechanism that would enable it
to monitor and/or verify how long these nonresidents spend here.Either of these options complicates the
methodology for levying this tax, and with the expected revenue stream from the
“snowbird tax” being so low, it may not be worth it.

If it passes, Minnesota would be the first state to
implement such a measure.It is strange
that the governor would go to such an extent to pass a groundbreaking tax like
this for such a small amount of revenue.Perhaps this is a case where the governor’s sense of fairness is
overshadowing practical considerations and political pressure.

Tuesday, March 12, 2013

What happens when you search for income tax on google this week? One might guess that there is discussion about how taxes are due next month. Maybe there would be information on assistance with preparing or filing taxes by April 15th? What actually shows up on google, and on any major news site if you were to look, is that nationally there are many states having conversations about getting rid of the state income tax.

The conversation

Many changes have been proposed this year at state legislatures regarding income taxes. As we have seen in D.C. and throughout the country there has been strong resistance to raising taxes the past couple years. Some states are attempting to take tax reform into their own hands and one step attempted has been to work toward eliminating state income taxes. According to this article in Huffington Post, 37 states have one party in control and 22 of those states are led by Republicans. That allows many anti-tax Republicans the opportunity to introduce this legislation with less push back from Democrats. The goal in many of these states is to cut the income tax and using sales tax to make up for the lost revenue.

Which states?

Last year Oklahoma and Kansas both attempted to eliminate the state income tax. Oklahoma was successful in reducing the income tax significantly while Kansas was not. The following states are currently trying to follow Oklahoma’s footsteps:

Why not?

A recent article in Forbes argued all states should repeal the state income tax to improve the economy and create jobs.

This is not a new idea and Alaska, who successfully abolished their income tax in 1980, has been used as a positive example as they were able to support themselves with energy production levies. Oklahoma supporters who fought and won last year are labeling it a “pro-growth” system and have been championing the low tax, economic development movement for a couple years. Not to mention all the states mentioned in the post below who currently have no state income taxes.

Despite the supporters, there are still several serious concerns that these states should not ignore. America’s poor and middle-class taxpayers don’t really need the extra burden of high sales taxes. If this does not create major growth and economic opportunity in Oklahoma, then how will they make up for the lost revenue? Who knows what challenges might arise from tax reform in these states? Will there be enough money for public services, schools, and the rising costs of an aging population?

Needless to say, 2013 will be an interesting year for the state income tax.

Sunday, March 10, 2013

As I gear up for the April 15 tax-filing deadline, I have
become acutely aware of some of the tax benefits that may be available due to
my status as a full time student. There are a couple of different income
tax credits that are available to students: The American Opportunity and
Lifetime Learning Credits. If an individual qualifies, these credits directly
reduce income tax liability. These are much more powerful incentive than a tax
exemption or deduction because it is a one for one dollar amount reduction in
the taxes that an individual pays (rather than reducing taxable income, to
which a tax rate is applied). In addition, taxpayers who qualify for neither of
the credits may be eligible to deduct some of their education expenses.
Although there is some debate on the need for higher education funding and
incentives, these tax benefits may be justified on at least two important
grounds: increased equity and the provision of public goods.

The American Opportunity Credit qualifies eligible taxpayers
for an annual $2,500 credit per student for the 2011-2012 tax years. This
credit applies to undergraduate students in their first four years of college.
Parents who claim such students as dependents may also qualify for the tax
credit. Interestingly, students may still qualify for the American Opportunity
Credit even if they are not liable for any taxes because 40% of the credit is
considered refundable. This may allow eligible students to collect up to $1000
if they qualify, even if they pay no taxes. The Lifetime Learning Credit Tax
Credit is available to students or parents of dependent students who are
admitted to an undergraduate or graduate degree, or other recognized educational
program. This credit, of up to $2000 per person per year, may be of particular
interest to students who do not qualify for the American Opportunity Credit.
While both of these tax credits are income restricted (at different levels),
students who qualify for neither may be able to deduct up to $4,000 in
education expenses on their federal tax returns. However, this tax credit is
also phased out for high-income earners, allowing eligibility only for
taxpayers with incomes slightly higher than the eligibility level for the
Lifetime Learning Tax Credit.

Because of the income limitations on the various education
tax credits and deductions referenced above, these incentives constitute
progressive tax policies because they increase vertical equity. Those who may
not be able to easily afford to send their children to school or pay for their
own education are given substantial tax breaks to facilitate tuition and
education expenses. In the case of the American Opportunity Credit, which is
partially refundable, the credit could actually contribute to the annual income
of very low-income students or their parents. Some
scoff at the idea of subsidizing higher education on equity grounds because
the children of high and low income earners alike have access to free or
reduced cost public education. Because the dollar amount of tuition is
essentially the same for both high-income and low-income students at public
institutions, the argument is that public education costs less as a percentage
of the income of high-income earners than low-income earners. Tax credits and
deductions such as the ones discussed in this blog post are important in
reducing the effect of the inequities inherent in extending low public
education tuition to all levels of income earners. These types of policies may
increase vertical equity in our tax structure and within markets for higher
education by both reducing tax bills for low-income earners and providing
additional incentives for low-income individuals to pursue higher education.

Tax credits for education spending is a powerful incentive
for encouraging the pursuit of higher education. It is important to be critical
of incentives that our government provides, especially when taxpayer money is
involved. Analyzing the extent to which education is a pure public good may
make more clear the reasons for government provision or subsidy of higher
education. If education were to be classified as a pure public good, then it would
have to be (1) non-excludable such that it is not possible to exclude
non-payers from benefitting from education, and (2) non-rivalrous such that
when more people consume education the benefit to others is not reduced. In
recent years, advocates
of education spending have noted a shift in society’s perception of
education from a public good to a private good. Higher education cannot be
classified as a pure public good because it is possible to include only those
people who pay for education, at least in terms of the private benefits that
accrue to individuals from education. However, education cannot be classified
as a pure private good because of the positive externalities that accrue to
society as a whole when people become more educated. Although there is lively
debate over whether or not our current educational system adequately
provides the type of education that will most benefit society, it seems
relatively clear that education provides benefits that accrue to individuals
and further provides some benefits that spill over to accrue to society as a
whole.

Tax incentives for education can help us achieve the dual
purpose of creating a more vertically equitable society. Furthermore, because
education is not a pure public good, such progressive policies can help balance
the need for individuals to pay for the educational benefits that accrue to
themselves and the need for society to subsidize the positive externalities
that arise from having an educated population.